Some people hold off on working with a financial advisor on a personal financial plan because they aren't sure what their plan should include. This confusion is understandable because financial plans should be customized. However, every plan should include at least the following elements.
A Personal Financial Plan Is About Achieving Goals
A financial plan should chart a clear course from where you are now to your financial goals and outline what you need to do to achieve those goals. Those to-dos can include things like how much you need to save, when you can retire or what you might be able to spend on a financial goal. Furthermore, the roadmap should be stress-tested to minimize the chance that poor market returns will upend your plan, even if you do everything right.
Determine Potential Risks
If you were disabled for a time and could not work, how would your ability to meet current expenses or save for future financial goals be impacted? If you are married, would drastic changes be required financially if you or your spouse pre-deceased one another? How about simple job loss—could you stay afloat until you found a new position?
A plan should address all these risks and potentially others as well. If you are concerned that this portion of the plan is just an attempt to sell insurance, consider working with a fee-only financial advisor. Fee-only advisors do not sell any products on commission and accept no referral fees. (For related reading, see: Fee-Only Financial Advisors: What You Need to Know.)
Ensure Your Financial Decisions Are the Best Choices for You
Financial optimization is the process of guaranteeing your financial decisions and actions are the best choices you can make for achieving your financial goals. Optimization might involve increasing savings via identifying ways to reduce taxes or spending on insurance. It could also involve something more complex like determining your ideal asset allocation, which will help maximize your long-term investment returns but not involve investing so aggressively you don’t feel comfortable remaining invested through a bear market. Regardless of what the optimization ultimately consists of, the end result is that optimization should help you reach your financial goals sooner.
Include a Clear Set of Actions
A personal financial plan should include a to-do list at the end of the plan, regardless of whether you are implementing the plan on your own or working with your advisor on a retainer basis. The to-do list makes it crystal clear what needs to be done to implement the plan, and it allows you to track your progress and guarantee nothing falls between the cracks.
Every plan is different, and different types of plans—whether they are retirement plans, planning post-inheritance or planning after a liquidity event—will address issues in addition to those outlined above. However, regardless of your personal financial situation, every plan should include these core elements.
(For more from this author, see: What I Wish a Financial Planner Had Told Me.)